By Rodrigo Campos
NEW YORK (Reuters) - There is nothing bland about betting on McCormick (NYSE:MKC).
The Maryland spice maker is preparing to report slowing first quarter earnings with its share price as high and expensive as it has ever been. Yet investors expect the company to hold its own on Wall Street, partly because of acquisitions.
McCormick is due on Tuesday to report earnings for the quarter ended in February and analysts expect a gain of 69 cents per share compared to 70 cents a year earlier.
The stock is up 12.6 percent so far this year, compared to a flat S&P 500 (SPX) and a gain of 2.2 percent in the S&P 1500 food products index <.SPCOMFDPR>.
McCormick stock trades at about 25 times its expected earnings, compared to a price-to-earnings ratio of close to 20 among its food producer peers, according to Reuters data.
That is its highest valuation ever but is well deserved, said Mark Hughes of Lafayette Investments in Ashton, Maryland, which has slightly more than 2 percent of its portfolio in McCormick.
Hughes said the high price does not concern him and sees potential for the company to continue to grow, especially through acquisitions.
"They’re in a very steady business that’s growing nicely but acquisitions have always been a key component of their growth strategy," he said.
McCormick is bidding for Premier Foods (L:PFD) but its sweetened offer was rejected by the British company last week. Two major Premier shareholders urged it on Thursday to talk with McCormick.
"In the past they’ve been pretty disciplined about what they’re willing to pay and generally acquisitions have been accretive very quickly to their earnings," Hughes said.
Since 2010 McCormick has acquired assets in India, Poland, China, the United States and Italy for about $850 million.
WORTH ITS SALT
McCormick's shares already have exceeded most analysts' expectations. Last week they hit a record of $96.46, more than 10 percent above the current median target of $87, according to Reuters data.
About 6.1 percent of its stock is sold short, according to data released Thursday, among the largest in the food producers group of the S&P 500 <.5SP302020> and above the 4.5 percent average for all the index's components.
Short sellers borrow stock and sell it, and make money when they can buy it back at a lower price. Despite McCormick's high valuation, some shorts are keeping their distance.
"It is overvalued, relatively high considering where food companies have been in the past years," said Brad Lamensdorf, a short sale specialist and co-manager of the AdvisorShares Ranger Equity Bear ETF (P:HDGE).
However, he sees "tremendous" potential for the company as a takeover target.
"I wouldn’t even understand why a short seller would want to short this stock."
He said McCormick's management is strong and "there's nothing in here that makes me concerned about their operation."
The company is in a quiet period ahead of earnings and declined to comment for this story.
With a market capitalization slightly above $12 billion, McCormick is smaller than most companies on the S&P 500 food products index, which includes Kraft Heinz (O:KHC), General Mills (N:GIS) and Kellogg (N:K), all with market caps above $25 billion.
On average over the past eight earnings seasons the stock has moved 3 percent after reporting and current options activity shows little expectation of any post-earnings move to go far beyond that.